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How Credible is Hong Kong's Currency Peg?

Author

Listed:
  • Urban Jermann
  • Bin Wei
  • Vivian Yue

Abstract

This paper develops an asset-pricing model to evaluate the credibility of Hong Kong’s Linked Exchange Rate System (LERS). Allowing for imperfect peg credibility, we derive closed-form solutions for exchange rates and option prices under potential regime shifts. Using HKD option data, we estimate market-implied probabilities of peg survival and the fundamental value of the HKD. Our results show that credibility fluctuates with U.S. interest rate hikes, local liquidity conditions, and Chinese currency dynamics. Compared with more standard Black-Scholes-based models, our approach provides more realistic assessments of peg sustainability.

Suggested Citation

  • Urban Jermann & Bin Wei & Vivian Yue, 2025. "How Credible is Hong Kong's Currency Peg?," NBER Working Papers 34300, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34300
    Note: AP IFM
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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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